(Bloomberg) -- The U.S. is at risk of a default in October or November unless Congress raises or suspends the debt limit, the Congressional Budget Office said, offering lawmakers a cushion of time to avert a potential crisis.
Without an increase, the Treasury Department’s ability to borrow would be exhausted and it would probably run out of cash sometime in the first quarter of the fiscal year starting Oct. 1, “most likely in October or November,” the nonpartisan CBO said in a report Wednesday. The debt limit, or the total debt the Treasury can issue to the public and other government agencies, has been on a two-year hold that expires July 31.
The CBO’s forecast is later than Treasury Secretary Janet Yellen had previously indicated. She had said the department’s tools could be exhausted as soon as this summer, while banks were broadly expecting a deal to avert a crisis as early as the end of September, with an outside risk of a technical default in November.
The government’s “large cash balance could also extend the time the Treasury has to continue financing government operations without issuing debt,” CBO analysts wrote in the report. The $450 billion cash balance the Treasury projects for the end of July, combined with the department’s so-called extraordinary measures, should allow the government to avoid a default until sometime during the fiscal first quarter, the CBO said.
The limit, which was last set at $22 trillion in 2019, will adjust to the current level when the suspension ends. It was $28.5 trillion on June 30.
Policy makers last suspended the debt limit in 2019 for two years, the last episode in a series of brinksmanship going back a decade, with votes to raise the ceiling often going down to the wire. With the new deadline fast approaching, unless Congress agrees to raise or suspend the ceiling again, the Treasury would have to begin special measures to cover expenses.
Once those tactics to pay government expenses are exhausted, the U.S. wouldn’t be able to meet its debt obligations -- a technical default -- or would be forced to delay making payments.
If the Treasury ran out of cash, “the government would be unable to pay its obligations fully, and it would delay making payments for its activities, default on its debt obligations, or both,” CBO said.
What’s unclear is exactly how or when Congress will act to raise or suspend the limit this time, given that Democrats hold thin majorities in both chambers and most Republicans are unlikely to go along. Democrats may be able to raise the limit on their own, either within or separately from a bigger package this fall enacting much of President Joe Biden’s $4 trillion economic agenda through a process known as budget reconciliation, but that still faces hurdles and the timing is uncertain.
It’s also more difficult this year to forecast the so-called “X Date” when the government could default because of the unpredictability of Treasury cash flows related to Covid-19, according to the Bipartisan Policy Center, a think tank. The group has projected that funds will run out by the fall.
“The timing and size of revenue collections and outlays over the coming months could differ noticeably from CBO’s projections,” CBO said Wednesday. “Therefore, the extraordinary measures could be exhausted, and the Treasury could run out of cash, either earlier or later than CBO projects.”
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